Successful SMB SaaS Companies Have a 2 Step Value Proposition

On first glance, SMB SaaS companies, those who sell Software-as-a-Service to small to medium businesses, may seem like any other software company. But they are quite a different breed. It’s not just the sales process that differs from traditional software. The entire business has be built differently. So must the product. And typically these products have a 2 step value proposition.

SMB SaaS companies sell to a radically different market than enterprise software companies. See the table below. The average traditional enterprise software company sells to firms with 3300 employees whose average payroll is $160M annually. In the US, there are only 17,500 of these firms. On the other hand, SMB SaaS companies sell to firms with 10 employees and $400k in annual payroll. There are about 5.8M of these firms in the US.

Encouragingly, the market size for enterprise software is roughly equal to the market size for the SMB market: about 57M potential seats in each. Of course, the true number depends on the market segment: sales, HR, payroll, expense management, etc. But these two markets require very different approaches.

SMB SaaS companies need to reach and market to 1,000 times more companies than their enterprise counterparts. Obviously this requires a new sales process.

Typically, this sales process leads with a product which excites users and triggers word of mouth sharing, and blog posts, and news articles. Direct sales aren’t profitable at this scale. Instead, mass media channels must be used: press, mobile app stores (iOS & Android), web app stores (Chrome, Google Apps, Intuit and Force). It means every customer support rep must handle hundreds to thousands of customers per year instead of tens of customers. Customer support becomes an inside sales team. They drive upsells and cross-sells, instead of a sales team.

In short, the whole organization must be different. Even the product development cycle is different. Without enterprise customers, there are no enterprise commitments. No promises to customers about releasing features on particular dates or paid upgrade cycles. It’s all subscription. Take it or leave it.

If the product has to be so different, what seems to be the key to success?

The most successful SMB SaaS products typically offer a 2 step value proposition: an initial value proposition to the end user and a longer term value proposition to a manager/decision maker. Take one of our companies, Expensify, which offers simple expense reports to the end user just by scanning receipts. To the controller/VP of Finance, Expensify offers better compliance with spend policies, a huge challenge for most companies of any scale. Similarly, Salesforce offered easier to use CRM to salespeople and better metrics for the sales manager. Yammer offers employees a better communication mechanism and their IT department compliance controls.

The end user value proposition drives press and word of mouth sharing. It’s the best angle to benefit from consumer app distribution channels. But the manager value proposition drives conversion to paid accounts. So if you’re serving this market, remember the one-two punch.

I am a partner at Redpoint. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 20,000 others receiving these blog posts by email.